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Fear -- a good incentive to save for retirement

Save for retirement? I'm scared not to.

Fear was my motivation for joining a 401(k) plan. I got scared straight into saving in my early 30s. Back then, like many fellow boomers, I believed that I would be forever young, despite evidence to the contrary. Saving for retirement was something to worry about down the road a piece.

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I was fortunate enough to hear a talk by two financial consultants at a meeting for professional women communicators. They underscored the importance of saving for retirement, particularly for women. The alternative, they warned, would be poverty, pure and simple. They backed up their statements with alarming statistics about what happened to women who did not take control of their financial destinies.

That was an awakening. On the one hand, I could spend my golden years panhandling at an exit ramp off I-95, storing my worldly possessions in a shopping cart, searching for a shelter to stay in at night. Or on the other hand, I could get on track to save for a modest retirement (it could have been a lavish one had I started 10 years earlier) and spend my free time volunteering at the wild bird shelter instead. Hmmmmm.

But too many people lack the motivation to save for retirement, says a study released last week, conducted by human resources firm Hewitt Associates, and researchers from Harvard University and the Wharton School of the University of Pennsylvania. A lack of motivation is the biggest obstacle to saving for retirement among workers who either contribute minimally or don't contribute at all to their 401(k) plans.

The study focused on the saving and investing habits of some 620 employees identified as low savers at a Fortune 500 company. Researchers wanted to understand the "mind-set" of employees who were not taking full advantage of tax-deferred savings, even when the company matched a portion of their contributions. They discovered:

  • More than half of the low savers didn't know the company offered a matching contribution;
  • Nearly three-quarters didn't know the rate at which the company matched contributions;
  • More than half admitted ignorance about investment matters;
  • Just under half said they didn't understand the investment options available within the plan.

So the logical next step for the researchers was to see what would happen after the low savers were educated about this stuff. This they did with half of the study's participants -- about 300 of them. They were taught about the potential gains from saving in the plan. They were told that they were forfeiting, on average, $1,200 a year in matching contributions. They learned about the investment options in their plan.


  • After getting this education, more than half remained undecided about whether they would contribute enough to the plan to get the company match;
  • 8 percent said the loss of matching contributions was insufficient to warrant a change in their behavior;
  • 28 percent said they planned to raise their savings rate;
  • Only 15 percent actually did.

So they know what to do, but don't do it? Perhaps these financial education programs lack that essential ingredient that motivates me: the real threat of poverty in old age.

Fear of lawsuits
Fear motivates other players in the 401(k) arena, too. The fear of getting sued explains why many employers don't dispense investment advice to their workers. Although the law has been loosened in recent years to allow companies more latitude in the advice they can offer without risking a lawsuit, many are still gun-shy about offering more than the blandest advice. They don't want to be held liable for losses we may suffer when the markets take one of their inevitable trips south. So, to avoid legal hassles, many companies hew to the safe path of offering general education rather than specific investment advice.

But the quality of these educational programs differs substantially from one company to the next. William Arnone, who wrote "Educating Pension Plan Participants" for the Wharton School's Pension Research Council, envisions an employer-paid program that employees could access any time, year round, that "would include education both custom-tailored to an employer's specific benefit plans and also individualized to each employee."

Such programs are rare, even among large companies that can best afford them. Arnone estimates only 20 percent of large employers offer a comprehensive education program. "The vast majority of participants in 401(k) plans remain on their own when it comes to obtaining financial-planning assistance. This dearth of suitable financial education will become an increasing concern to employees, their employers and to society," he writes.

The value of education
A paper released earlier this year, also by the Wharton School's Pension Research Council (penned by Steven Nyce), confirms that employee access to high-quality financial communications has the effect of markedly boosting participation and contribution rates in 401(k) plans. Participation rates among employees receiving a "low-communication" program run 62 percent vs. 84 percent for employees getting a "high-communication" program, which in addition to plan information, also includes educational materials, tools that enable employees to project retirement-income scenarios and Web-based communications. That's a dramatic difference.

It's something that employers should keep in mind when weighing the merits of providing a quality education retirement program to their employees. It's a relatively inexpensive way to attract and retain valuable workers.

It's also in employers' best interests to attract as many employees from all levels of the organization as possible to their 401(k) plans. Otherwise they risk running afoul of pension laws designed to prevent discrimination favoring highly compensated employees.

If your employer doesn't offer a comprehensive education program, you must take it upon yourself to educate yourself to the fullest extent possible about how much to invest and where to invest your money.

The maximum you can contribute in a 401(k) plan in 2007 is $15,500 ($20,500 if you're 50 or older), though an employer match can take that to a much higher level. Even if you have debt, you should divert some money to your 401(k) plan -- at least enough to get the full company match.

Read every scrap of information provided by your human relations department. Learn as much as you can about how to allocate your money and the investment options in your plan.

Devote all your free time for one week to this endeavor, if that's what it takes. If you need incentive to get going and the threat of poverty doesn't seem real to you, then tap into your strong desire for financial freedom. Because, ultimately, that's what we all want in retirement.


-- Updated: Sept. 27, 2007




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